January 2018

Pan European real estate equities started the New Year strongly (alongside broader equity markets) but gave up those gains and more, resulting in underperformance versus broader European equities with the benchmark falling -2.34%. The Trust’s NAV fell in line at -2.30%. Currency played its part with GBP strengthening against EUR. The Continental element of the benchmark fell less than 1% in EUR terms but when measured in GBP the figure was – 2.1%.

The UK performed poorly with a total return of -2.9% as the positive momentum of December, driven by corporate activity, evaporated. French President Macron highlighted during his UK visit that “there can be no differentiated access for financial services” which dampened the optimism witnessed in December with the completion of Brexit Phase 1. The 30bp surge in 10 year UK gilt yield to 1.5% negatively impacted the performance of UK REITs during the month. UK Retail property stocks were particularly weak (e.g. Hammerson -9%) reversing their December gains on the back of renewed eCommerce competition concerns, poor Christmas trading updates and UK general retailers store closures or Rightsizing’ initiatives.

Great Portland Estates reported a fairly solid trading update in terms of lettings. The London office developer/investor also proposed a £306m capital return to shareholders, based on the net proceeds from the sale of 240 Blackfriars Road and 30 Broadwick Street. However, in spite of these positive news and much like in 2017, the share price reaction was largely muted as investors remain sceptical on the outlook for London offices. The Fund currently has a -0.6% net exposure to London offices.

On the continent the economic strength continues with the EU composite PMI reaching a 6 year high and French strong Q4 GDP boosted 2017 to 1.9% growth, the highest since 2011.

December’s labour market data pointed to a further reduction in EU unemployment but it also highlighted that there is still some slack in the EU labour market which should limit wage driven inflationary pressures. The 10 year German government bond yield moved up 30bps to 0.70%. This impacted the most rate-sensitive segments of the listed real estate market such as German Residential. We continue to position our portfolio towards companies benefiting from higher rental growth (e.g. Stockholm, Paris offices, Hotels), tight supply (e.g. logistics, German office markets) and avoid pure bond proxies.

Spain was the only region to perform positively as investors took comfort from the dialling back of rhetoric from the Catalonian independence movement notwithstanding their success in the elections. Our largest overweight in Spain, Hispania returned 7.3% in the month.

The fund continues to reduce exposure to retail property. With no exposure to the largest shopping centre landlords in the UK (Hammerson and Intu) we have also reduced exposure to Klepierre in France. We maintained the position in Unibail reflecting our view that the share price has already captured much of the negative sentiment surrounding the announcement of the takeover of Westfield.